Where is this Consumer Carnage I Keep Hearing About?

Many of my comments in recent weeks have centered on the consumer sector. The reason is pretty simple. Most people have been recommending investors shun consumer discretionary names in their portfolios, and the stocks have indeed reacted to the fear of a slowing consumer by getting absolutely decimated. Now, with many of these retail related business reporting their second quarter results in August, and issuing outlooks for the second half of 2006, it is becoming clear that, just as I have been suspecting and writing about for some time, sentiment seems to be unfairly negative as far as consumer spending is concerned.

Aside from Wal-Mart, retailers like Target (TGT), Kohl’s (KSS), JC Penney (JCP), Federated (FD), and Coach (COH), to name a few, have reported very good results. Last night Abercrombie and Fitch (ANF), a Peridot holding, raised guidance for the second half of 2006 and the stock is up nearly $7 per share today.

The takeaway point here is that even though the housing market is soft, interest rates have risen substantially, and gas is north of $3 per gallon, the U.S. consumer is not going into hiding. Gas prices were over $3 this time last year, interest rates are still not extremely high compared with historical averages, and most people don’t have adjustable rate mortgages or rely on investment properties for income.

There is no doubt that the lower end will struggle to make ends meet more-so than others, and Wal-Mart’s lackluster results shows evidence of that. However, if you focus on areas of consumer spending that won’t be adversely affected as much, namely the high end and the teenage segment, stock prices could do very well despite all of the people out there warning of impending doom.

2 Thoughts on “Where is this Consumer Carnage I Keep Hearing About?”

While i agree with you, how do you reconcile articles like the one in the WSJ today “Consumers Curb Upscale BuyingAs Gasoline Prices, Housing Bite” – implying the high end might be having a tougher time than prev thought…

I tend to ignore speculation in the media and just focus on what kinds of results the companies show. For the most part, sales have been brisk at the high-end.

Some of the companies in the article might have had stock price declines, but the likes of Starbucks and Whole Foods Markets are doing very, very well.

For instance, SBUX had a soft month of comp store sales because of a new drink rollout issue. That combined with a very high multiple stock caused a sell-off in the marketplace, but I don’t think there is any evidence that their loyal customers are cutting back on coffee purchases. I don’t own SBUX, but that’s just one example.

We’ll have to wait and see to see if thing slow down considerably, but so far i haven’t seen it. And the $3 gas argument is getting old… gas has been at this level for a year now.

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